OBOR: The “Road” ahead for Globalisation

The world seems to be shrinking geographically day by day. It wasn’t long ago when the advent of internet and advanced telecommunication technologies helped to integrate nations and increase cooperation and trade amongst them. We can safely say that without this phenomenon, the world would be facing a situation of divergence rather than convergence. Recent developments however point to a phase where nations are looking to close down borders and increase protectionism. China, on the other hand owing to its export oriented growth model, has taken one step further to integrate multiple nations through its project called One Belt One Road (OBOR).

The Cost-Benefit Analysis

OBOR aims to build land and sea links between China and Europe through roads, railway lines, power projects and ports in potentially over 60 countries. The China initiated Asian Infrastructure Investment Bank (AIIB) is proposed to finance this huge project. According to an article published in the Diplomat, the AIIB is to begin with an authorised capital of $50 billion, eventually to be raised to $100 billion. The projected outlay for the whole OBOR initiative is forecasted at $1.4 trillion. The reason that China is willing to invest this much is that it expects annual trade with cooperating/participating countries to be worth US$2.5 trillion within a decade – up from US$1 trillion in 2015. Expected gains easily outweigh the expected costs.

Why is it so important to China

A recent paper by Peter Cai for the Lowy Institute for International Policy titled “Understanding China’s Belt and Road Initiative” states that there are essentially 3 reasons for the OBOR inititative.

One is that China wants to use connectivity and infrastructure development in neighbouring regions to address regional imbalances within China, particularly between landlocked western provinces and the prosperous sea-facing regions in the east. He says that “nearly every province in China has developed its own OBOR plan to complement the national blueprint… Many see it as a golden opportunity to obtain cheap funding and political support for their own infrastructure projects under the banner of OBOR.” This could have a downside too, in that it provides local builders, infrastructure companies and politicians to engage in corruption.

China’s comparative advantage as low cost manufacturing base is ending as wages rise in the country, and the West looks to backshore its jobs. Hence it “wants to capture the higher end of the global value chain.” To this end, China needs to upgrade its industry, make it more innovation and quality-driven with a view to export high-end Chinese manufactured goods to countries in the neighbourhood participating in OBOR – at the expense of Western-manufactured goods.

OBOR also helps China address the problem of excess capacity it has faced since the 2008 financial crisis. Chinese firms borrowed heavily when credit was available and now are saddled with overproduction; for instance in 2015 the country produced more excess steel than the combined production of the US and European Union. Neighbouring countries are not in a position to import such volumes. Cai argues that OBOR “is less about boosting exports of products such as steel and more about moving the excess production capacity out of China.” He writes that “Beijing wants to use OBOR to migrate whole production facilities”, a point Chinese Premier Le Keqiang made to ASEAN countries in 2014 when he said that China would like to move its surplus equipment in steel, cement and pleat glass to countries in Southeast Asia via foreign direct investment, so that they can build their infrastructure and produce goods locally.

The Indo-Pak angle

It has been widely projected that India’s reluctance to join OBOR is mainly because of the 1300 km long China Pakistan Economic Corridor (CPEC), which violates India’s sovereignty as the project covers the Pakistan-occupied Kashmir (PoK) region. The CPEC is one of the flagship projects of the OBOR, and is touted to reduce the distance for Chinese goods bound for the US, Europe, Africa and the entire western world by a substantial 2,000 miles and vice versa by providing an alternate to the ‘Strait of Malacca’ route, through which most Chinese trade currently takes place. This whole project is estimated to cost around $54 billion, but the benefits of this path will lead to a very substantial reduction in costs for exporters and importers alike, and would lead to an increase in the Volume of Trade.

China has been increasing its presence in the Indian Ocean with the ‘String of Pearls’ ambition: A term coined by the Americans and often used by Indian defence analysts to refer to a Chinese game-plan of encircling India through a network of airfields and ports. With an existing presence in Chittagong port (Bangladesh), Hambantota port (Sri Lanka), Port Sudan (Sudan), Maldives, Somalia and Seychelles, a control of Gwadar port in Pakistan, where the road is supposedly going to lead to, establishes complete dominance of the Indian Ocean by the Communist nation.

Though Pakistan has denied any current Chinese military presence in the country, China has often hinted at deploying its marine corps at the strategically important port. The possibility of China stationing its troops in the region to secure its investment in case of a possible terror attack in militancy-infected Balochistan cannot be ruled out.

Not just India, even Japan has refused to join the project and started its own Belt and Road initiative named as “Partnership for Quality Infrastructure” which would cover Indo-Pacific and Eurasian regions. Japan has invested around $150 billion for this project.

Wooing the ASEAN economies

The 10 ASEAN nations are of strategic importance to the Chinese. For this reason, Chinese investments have only increased in these economies in order to strengthen their relations and include them within the scope of the OBOR too. By the end of May 2016, the two-way investment had exceeded US$160 billion. Some notable takeaways from ASEAN-China relations are:

Bilateral trade has also increased massively, from US$7.96 billion in 1991 to US$472.16 billion in 2015. Asean and China are seeking to double their trade value, setting a target of US$1 trillion by the end of 2020.

There will be a new high-speed rail line running from southern China through Laos to Thailand’s industrial eastern coast. China has given a new pledge to cash-starved Laos for the construction of a US$6 billion railway project linking Laos’ capital Vientiane to China’s southern Yunnan province by 2020. Once operational, the railway will be Laos’ longest and fastest line, with an average speed of 160km/h and 60 per cent of the line being bridges and tunnels.

Beijing has also won the contract to build Indonesia’s first national high-speed rail link – a US$5.1 billion, 150km rail project connecting the capital Jakarta to Bandung, Indonesia’s third-largest city.

As part of OBOR, China is also going to invest heavily in high-speed railway and port development projects in Thailand, Malaysia, Singapore, Indonesia and other neighboring South Asian economies.

Conclusion

Whether the OBOR is successful or not, it is definitely an idea which makes us go “WOW”. It is something unlike what we have seen in recent times. China has obviously a lot to gain if this concept is materialized into reality. They have started other to get other nations on their side for this project with promises of investment and infrastructure development as part of the benefits of the project, not to mention better connectivity and increased trade.

There will however always be some opposition to this. Indians feel that the CPEC is in infringement of their sovereignty. Hence, they are not in favor of joining hands with the Chinese. Moreover, there is the fear that with the OBOR, the price of Chinese goods would go down significantly due to less transportation, lead times, and less costly inventory management systems. This would make Indian exports less favored to Chinese ones. This is not a positive scenario for our Terms of Trade.

At a time when a lot of countries are needing investment in infra to increase their growth, OBOR is certainly helping that. Whether international sanctions against this project by opposing nations come to effect, or whether they are actually able to connect East China to West Europe, the current investments are certainly helping some of the nations. Only in a decade or so will we be able to see what comes of it, but till then it is best to let this play out on its own. We as the public are best off by just speculating, and voicing our opinions at the public level so that decisions taken by the leaders are well informed ones, and not based on asymmetric information!